Most of us begin our training in business with a textbook. But textbooks are out of date by the time they are written. Our lives, our careers and our experiences evolve. The needs and concerns of our businesses change. Of course, some topics in the boardroom are timeless. Executive compensation is one example. But the ways to insure pay for performance evolve (witness the say-on-pay debate), and for that and other governance issues we need to understand what works today and why.
Drexel University's Center for Corporate Governance exists on the premise that academia and business are natural partners. Directors seek excellence in the boardroom. Researchers seek the latest practices and ideas that can translate to board excellence. The best business schools are filled with academics continually monitoring corporate America, trying to understand best practices and testing the ideas about best practices against the data. Best practices and empirical evidence evolve with the times. Keeping abreast of relevant research informs executive practices, and keeping abreast of the latest practices informs academic research.
Admittedly, not all academic research is accessible to the practitioner or useful in immediate practice. But much research does have practical implication. Recall the “odd-eighth scandal” of Nasdaq: It led to a $1 billion settlement and eventually the use of decimal prices to lower trading costs, saving investors billions in transaction costs. Ever heard of the terms beta coefficient or portfolio diversification? Do you use the Black-Scholes Option Pricing Model? Have you had to deal with option backdating? All are topics that began as scholarly research on college campuses.
Countless other ideas began on Wall Street or in our legislatures and have been aggressively studied in academia: poison pills, staggered boards, state antitakeover laws, pay for performance, and independence of directors.
At the time this column is written, Drexel is about to host two conferences designed around best practices in the boardroom and the latest scientific evidence in corporate governance. The first, our Director's Dialogue, features a daylong interactive exchange of ideas among leading officers and directors of major corporations. The second program is our academic conference on corporate governance. Leading researchers from around the country will present the latest evidence on executive compensation, insider trading, say on pay, and international practices in corporate governance.
To be sure, academics don't know all of the answers, but they are trained to approach the questions in an objective, scientific manner. At their best, academic researchers are attuned to the latest business practices and experiences so that their experiments are designed in meaningful ways. While experience is the best teacher, one observation “from the trenches” isn't necessarily representative of results from a controlled analysis of hundreds of such observations. Practitioners need to know what part of their experience is useful in the next unique situation. Analyzing a large body of data in a controlled manner helps to provide that knowledge and eliminates idiosyncrasies that are unlikely to occur again.
Being exposed to current research or ideas from that research is the only way to stay ahead of the curve — and of Washington! Today, our legislative leaders are considering bold initiatives related to governance practices. Shareholder access to the boardroom, broker votes, and federal legislation related to say on pay are just three examples. Without an objective scientific analysis of the data, our government cannot hope to develop informed initiatives. Unfortunately, one suspects that too little attention is paid to the evidence. That's too bad. Business and academia are natural partners, and their intersection is the natural place to weigh the merits of — and perhaps to provide compelling evidence against — any new legislation.
At all times, but especially so in these times when boards are facing the prospect of legislative incursions into how boards fulfill their fiduciary responsibilities, it is imperative that business leaders keep abreast of cutting-edge findings from academic research. In my next column I'll reveal some of the substantive findings from our conferences. â–
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